Methods of providing depreciation

There are many methods of calculation of depreciation . No one apply on the all assets , because , different assets have different nature and according to management policy and effect of laws specially tax laws , different methods are used for providing depreciation . There are 10 methods of calculation of depreciation . Out of which approximate 5 are the most important and it should be learned .

1st method of providing depreciation

Fixed installment method

Fixed installment method is that method , in which we calculate fixed rate of depreciation and then with this rate we deduct every year from fixed asset .

--------------------------Original cost of asset - scrape value of asset
Depreciation =     ___________________________________
-------------------------Effective working life of asset

For example Satifsan purchased an asset of $ 20000 and he can use it for 4 years and after four year its scrape value will be $ 4000 . Calculate depreciation with fixed installment method
Depreciation = 20000- 4000/4 = $ 4000
Rate of depreciation = 4000/20000X 100 = 20%
every year we provide $ 4000 and deduct from original cost of fixed asset . So its other name is original cost method or straight line method of providing depreciation .

Benefits of this method

1. It is easy to calculate
2. It show zero value of fixed asset at the end of its life .
3. It divides all weight of total depreciation equally in all period of life of asset .
4. After providing depreciation , balance will shows correct value of fixed asset .

Disadvantage of this method

1. After showing zero value of expiry of fixed asset in books , but it is possible that asset is in good position . Then what provision will show in books , this method does not tell to accountant .
2. Some assets ' value will increase after spending of time at there we can not use this on that assets .
3. There is no provision in this method for buying new asset after scrap of old assets .